CRE Recovery Has Legs, Fueled by Finance

Posted on February 12, 2013

LOS ANGELES-The US Commercial Real Estate markets continued to recover in 2012, with transactional volume building modestly into the New Year. To understand what is in store for 2013, it is useful to acknowledge the trends that have thus far supported the recovery: low interest rates, tame supply/demand dynamics, and efficient capital markets.

Alone, these trends will not sustain a recovery without meaningful job growth and a broad economic expansion. While the first set of factors are now well established, the latter are yet to materialize except in a few select regions. Abundant, low-cost capital will drive increasing transactional volume in the New Year. Here is why:

The Federal Reserve insists that interest rates will remain low at least into 2015. I believe them. Low rates ensure that commercial real estate is taken seriously as an alternative investment class.Institutional money will continue to be allocated for commercial real estate in the form of preferred equity and mezzanine loans. This, coupled with ample, low-cost debt, will drive increased transactional volume.

The shape of the post-crash debt markets continues to evolve. 2011 was the year that capital began to flow back to the debt markets and efficiency returned. Policy clarity, Fed accommodation, and healing bank balance sheets contributed to a more stable lending environment. Life companies, large national and regional banks, and a restarted CMBS market began to address the large liquidity needs of the commercial real estate market.

In 2012, CMBS reestablished its place as an important provider of commercial real estate debt providing $50 billion in new commercial real estate loans. Many insiders expect CMBS originations to grow to more than $75 billion for 2013. Life companies were very active in the first half of 2012 and accounted for more than $50 billion of new commercial real estate loan origination. The trends to watch for in 2013 are the return of the small and middle market banks.

In the fourth quarter of 2012, we saw a rush of aggressive lending by banks that, not too long ago, were written off for dead. Also watch for interest in previously out-of-favor asset classes: We have lender interest in funding infill condos and several debt funds focused on residential land. Land! What a difference a year makes.

Another factor driving increased transactional volume is the abundance of equity and mezzanine funds seeking higher yields. Billions of dollars raised in anticipation of high-yielding, distressed opportunities, that never materialized, have since retooled with lower yield expectations that are more in line with current opportunities. Yields across commercial real estate are modest, but the availability of low-cost capital will continue to make commercial real estate a very attractive investment in the New Year.

Specific Trends to watch: The housing recovery will be firmly established. Retail will benefit. Policy and demographic changes will drive interest in healthcare properties. Hospitality gets hotter. Technology will make strides to address inefficiencies in commercial real estate as it has in all other industries, think and Transactions are back.

Yes, what a difference a year makes. Here’s to a prosperous 2013!

David A. Rifkind, is principal and managing director of George Smith Partners Inc. The views expressed in this column are the author’s own.

David Rifkind,